Hot Biotech Stocks for the Long Term
Hot Biotech Stocks for the Long Term
By Hal Plotkin
Silicon Valley Correspondent
Analysts say that indiscriminate selling, despite recent reports of important clinical progress leaves several biotechnology stocks attractively priced for investors with a one-to-two-year time horizon.
Investors who got into biotech stocks last year saw the sector more than double in valuation before its precipitous slide in March.
“It’s important to remember that the group is still up nicely over where it was early last year,” says Jim McCamant, publisher of the Medical Technology Stock Letter, based in Berkeley, Calif. “But it’s been a wild, wild ride.”
McCamant is a veteran biotech stock picker with one of the best track records in the industry. His model biotech portfolio, which was up 69 percent last year, has increased 1,529 percent since he initiated coverage of biotech stocks in 1987. His aggressive biotech portfolio has fared even better, up 197 percent last year and a staggering 5,654 percent since 1987.
In an interview with CNBC.com immediately following the conclusion of this week’s meeting of the American Society of Clinical Oncologists in New Orleans, McCamant singled out three biotech stocks that he says are almost certain to deliver respectable returns for investors who have the patience to hold onto them for one to two years.
“Stocks that went up in anticipation of the [cancer] meetings got clobbered this week,” McCamant says. “But what’s really odd is some of the them went down on what is really very good news.”
McCamant says these three stocks look particularly attractive to him right now.
Chiron Corp. {CHIR}
Chiron, based in Emeryville, Calif., specializes in biopharmaceuticals, vaccines and blood testing.
The company’s stock has zigged and zagged along with the rest of the sector in recent weeks.
“I’m confident Chiron’s earnings are going to exceed expectations handily,” McCamant says.
The key, he says, is expectations of forthcoming Food and Drug Administration approval for Chiron’s newest nucleic acid blood testing technology, which is already being used by the Australian Red Cross Blood Service to test that’s nation’s entire blood supply for hepatitis C and the human immunodeficiency virus-1 (HIV).
“The key is when they get their FDA approval,” McCamant says. “It should happen sometime between the summer and the end of the year. When it does, that will get them up to a dollar [per share] in earnings pretty easily.”
“The blood-testing product will be important for Chiron,” agrees Peter Ginsberg, an analyst at U.S. Bancorp Piper Jaffray in Minneapolis.
Ginsberg rates Chiron “buy” with a 12-month price target of $38. He says McCamant’s two-year horizon for Chiron investors sounds about right to him.
“Chiron is in the process of transforming itself into a higher growth, higher margin company,” Ginsberg says. “I agree it’s a relatively low-risk investment right now, considering how much the stock has diminished. But I think it is going to be an evolutionary story, rather than a revolutionary story.”
ImClone Systems Inc. {IMCL}
New York-based ImClone Systems’ lead cancer therapeutic candidate, C225, acts as a biologically specific inhibitor to an important molecular switch that regulates cell division and propagation. Earlier this week, the company announced encouraging results in phase two clinical tests of the compound targeted at treating head and neck cancer.
The company also announced a favorable response to treatment in all six of the first cases of colorectal cancer using the new therapeutic.
“There was really good phase two data and good oral information presented at the conference,” McCamant says. “But what is really exciting is the early colorectal data. Six patients is a very small number. But when all six respond, it becomes very interesting. We’re talking about patients who failed prior chemotherapy.”
Robert Toth, biotech analyst at Prudential Vector Healthcare in San Francisco, agrees.
“I would put ImClone at the top of my list as well,” Toth says. “Over two years, you’re looking at a chance to see a fourfold increase in the stock.”
Toth says that if ImClone’s compound wins FDA approval, its performance is likely to mimic that of other biotech stocks, such as IDEC Pharmaceuticals Corp. {IDPH}, Immunex Corp. {IMNX} and Medimmune Inc. {MEDI}, all of which soared fourfold or more after winning FDA approval for their compounds over the past few years.
Toth upgraded ImClone’s stock to “strong buy” from “accumulate” and set a 12-month $165 price target on Wednesday, at the conclusion of the cancer meeting.
“I came out of the meeting feeling it had greater potential than when I went into the meeting,” Toth says. “This is a quality name, and they could have a drug on the market next year.”
The analysts warn, however, that investments in biotech companies are fraught with risk, given the possibility that unforeseen issues will cause drugs to be pulled from testing before they ever reach the market.
“That could always happen,” McCamant says. “But there’s been a lot of progress in this area, and ImClone’s results are very encouraging.”
“I think everyone on Wall Street has come to the conclusion there will be a huge market for this drug when it comes to market,” Toth adds. “That’s why [the stock] already has a high valuation. But there are a limited number of investors willing to play in the space before final approval. It’s after final approval when you usually see the really big pops. I think that’s what we’re looking at for ImClone.”
ISIS Pharmaceuticals Inc. {ISIP}
Carlsbad, Calif.-based ISIS Pharmaceuticals is widely regarded as the leader in “antisense” technology, which turns off the production at the genetic level of a variety of unwanted proteins that play a role in cancer, inflammatory diseases and viruses.
On Monday, the company announced a roughly 50 percent response rate to its ISIS3521 compound in 30 patients with non-small cell lung cancer, a particularly virulent and almost always fatal form of the disease.
“The antitumor activity seen in this trial in patients with non-small cell lung cancer is compelling,” said Dr. Alan Yuen, in announcing the data. “It is noteworthy that the survival data continues to suggest greater benefit than would be expected with the use of standard chemotherapy agents alone.” Yuen is the professor of medicine at Stanford University who conducted the trials.
“ISIS pharmaceuticals is the clear leader in antisense,” says McCamant, who says the technology is thought to have many possible applications in a wide range of ailments.
The stock came under some pressure late last year when clinical data indicated the firm’s compound aimed at an intestinal malady called Krone’s Disease didn’t reach statistical significance.
The latest clinical results, however, indicate that the company is on the right track, McCamant says.
“The ability to turn off genes is absolutely critical,” McCamant adds. “It’s what all the human genomics stuff is all about, how researchers determine what individual genes do.”
“I definitely agree,” says Fariba Ghodsian, senior vice president at Roth Capital Partners Inc., a health-care and high-tech investment bank based in Los Angeles.
Ghodsian has a “buy” rating on ISIS Pharmaceuticals’ stock with a $20 12-month price target.
“ISIS has a very strong story,” Ghodsian says. “”They’re in a very broad area and have received a patent in antisense which makes them a major player. The major bottleneck is to find the functions of various genes. That’s where ISIS comes in. They have and are forming a number of collaborations with major pharmaceutical companies. They have a pretty good, defensible position in antisense.”
Ghodsian adds that it will probably be another two to three years before ISIS Pharmaceuticals’ antisense technology reaches the commercialization stage.
“That’s why I think this is a good time for this stock,” Ghodsian says. “One big reason I’m excited about ISIS is they don’t have all their eggs in one basket. Their broad technological base mitigates risk. If you bet on a company with a broad technology platform you can come in much earlier.”
Ghodsian says investors might also want to consider San Diego-based Maxim Pharmaceuticals Inc. {MAXM}, which is scheduled to report what she says will be impressive results in connection with the treatment of melanoma patients with the firm’s new compound at the Melanoma Conference scheduled for June 2 in Pittsburgh.
“The Maxim results appear to have doubled life expectancy in patients with melanoma and liver metastases,” Ghodsian notes. “It’s going to be some very, very exciting news.”
McCamant says investors who get into these stocks shouldn’t panic or bail out of them during the usual summer biotech doldrums, when there are fewer major scientific meetings or other events that move the sector. He also notes that reports of four recent unexpected patient deaths during Genentech Inc.’s {DNA} trail of its angiogenesis inhibitor, which is designed to cut off the blood supply to tumors, spooked many unsophisticated biotech investors.
What those investors missed, McCamant says, is that Genentech’s results were encouraging enough for the company to move forward with the next stage of clinical trials, on larger numbers of patients.
“You can expect to see some adverse reactions with powerful new compounds,” McCamant adds. “But the really important news coming out of the meeting were the indications that some of these approaches are in fact valid and ready to be moved along to the next stage. Overall, we heard some very, very good news.”
